Exchange Rate Regimes and Supply Shocks Asymmetry: The Case of the Accession Countries
Center For Econ Research & Grad Education, and Econ Institute, Prague (CERGE-EI); National Center for Scientific Research (CNRS) - Research Center On Transition Economics (ROSES)
Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)
Université Paris I Panthéon-Sorbonne - Centre Maison des Sciences Economiques
CEPR Discussion Paper No. 3408
This Paper reviews the pros and cons of an early EU enlargement towards Central and Eastern European Countries (CEECs hereafter). First, the Maastricht criteria, which cannot be literally assessed during the catching up process, but that nevertheless mirror the huge efforts undertaken in order to (i) stabilise the economies, (ii) converge towards the EU, and then (iii) participate into the EMU, are analysed. Second, real convergence is observed to occur at different rates, depending upon the initial conditions faced and the productivity gains realised by each country. Third, computing the correlation of demand and supply shocks in a wide sample of Euro countries and the CEECs, gives some indication of the similarity of the business cycles and economic structures of the CEECs on the one hand, and the EU on the other. Yet, we argue that looking at static correlation only (averaged over the last decade) is too simplistic, as the transition process will blur these averages. Using the Kalman filter, we are able to compute time varying correlation, hence differentiating between the transition and the most recent period. Our results emphasise an ongoing process of demand shocks convergence, but supply shocks divergence. Various exchange rate strategies are then discussed.
Number of Pages in PDF File: 45
Keywords: Exchange rate regimes, OCA (optimal currency area) criteria, Kalman filter, EU enlargement
JEL Classification: E32, F30, F42working papers series
Date posted: June 14, 2002
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